Contractors Hit by Almost $1 Billion in Afghan Taxes

May 14 (Bloomberg) -- U.S. government contractors
supporting operations in Afghanistan have been hit with almost
$1 billion in potentially inappropriate taxes and penalties from
the Afghan Ministry of Finance since 2008, according to a U.S.
watchdog agency.

A sample of 43 companies operating under contracts with the
Pentagon, State Department or U.S. Agency for International
Development has been assessed $921 million of taxes and
penalties for unpaid levies, John Sopko, the special inspector
general for Afghanistan reconstruction, wrote in a report
scheduled for release today.

Under previously negotiated agreements between U.S.
agencies and the Afghan government, at least some of the
contractors and some categories of income or business receipts
should be exempt from Afghan taxes, according to the report. The
43 contractors, none of which were named in the report, have
paid only about $67 million of the amount the Afghan government
says they owe.

“U.S. agencies need to have assurance from the Afghan
government that” U.S. tax dollars “used to build schools,
roads, health clinics, water treatment facilities and funds
spent to secure the country are not improperly taxed,” Sopko
wrote. Employees of some contractors have been arrested over
unpaid taxes, and some work supporting U.S. operations may have
been interrupted, he wrote.

Taxation Negotiations

Contractor taxation issues will be included in negotiations
with Afghanistan about the U.S. presence after the American
combat role is slated to end in December 2014, State Department
officials told Sopko.

Sopko said his auditors weren’t able to determine the
legitimacy of tax demands, in part because of disagreements with
Afghanistan about whether some negotiated tax exemptions apply
to subcontractors as well as prime contractors.

Afghan revenue authorities also denied requests from
Sopko’s auditors for documentation of tax assessments levied
against some companies, according to the audit.

U.S. agencies, including the Pentagon, “agree that Afghan
taxes levied on non-Afghan contractors working for those
agencies are illegitimate.” Sopko wrote.

The State Department, the Pentagon and USAID “appear to be
failing” in their effort to prevent the taxation because they
lacked a “unified position,” Sopko wrote.

That “has allowed the Afghan government to exploit”
differences between the U.S. agencies and “has created an
uncertain business environment.”

“The result is that after 11 years of reconstruction
efforts” for which Congress has appropriated $89 billion
“contractors and U.S. contracting officials alike are unclear
as to who” and “what activities are supposed to be taxed,”
Sopko wrote.

Sopko heads an independent agency created by Congress to
oversee U.S. spending in Afghanistan